The establisment of the government’s tax review committee raised vocal responses from tax experts and economists this week.
They ranged from calls to increase the tax burden on the rich and middle class to warnings that the committee risks becoming little more than a revenue-seeking tool in the face of poor economic growth.
The committee was announced on July 17 and will be headed by respected judge Dennis Davis. It was launched alongside international efforts driven by the G20 to prevent major corporations from paying little to no tax.
The committee’s broad terms of reference include a study of the overall tax base and burden, including an analysis of the sustainability in the long run of the overall tax to gross domestic product ratio and the tax to GDP ratio for the three major instruments: personal income tax, corporate income tax and value added tax.
The committee will examine corporate taxes and tax avoidance, including base erosion and profit shifting — a key focus for international authorities.
The mining tax regime will also come under scrutiny. Civil society economists said the review should ensure that the tax taken from middle to high earners rises to address persistent inequality and to allow the state to fund programmes such as the National Health Insurance scheme (NHI).
Tax to GDP ratio
The tax to GDP ratio — a measure of a country’s overall tax burden — is about 25%. This year it rose to 25.4% but prior to the financial crisis it peaked at 27.6%.
Dick Forslund, an economist at the Alternative Information Development Centre, argued that the tax to GDP ratio, should not be artificially “pegged” at 25%, when a “far more appropriate ratio” was between 30% and 35%, particularly if South Africa was to fund the NHI.
Forslund criticised aspects of existing tax policy in a paper released in November.
He argued that adjustments to tax brackets to compensate for inflation, or so-called bracket creep, have reduced the overall tax pressure on the highest earners.
Forslund criticised the argument that South Africa’s narrow tax base is too stretched. South Africa has more than 13-million registered taxpayers but only about R5-million are liable to pay tax.
The general public also pays indirect taxes, however, through VAT on goods, as well as items such as the fuel levy. According to Forslund this is a reflection of the inequality of South Africa’s economy.
Individual income
In 2010 about 58% of individual income went to 10% of the population, according to the paper.
The top 10% of the country is “living it up”, and to break with the problem of a narrow tax base, the country had to break with the low wage regime, Forslund said.
Greater efforts were also needed to combat legal tax avoidance and evasions by large companies, he said.
The review includes the examination of VAT, but this form of tax cannot be increased as it only hurts the poor majority of the country, who are the “most unable to voice their unhappiness”, said Forslund.
Other economists questioned whether the call to raise the tax to GDP ratio could be made in an environment where the public was not receiving adequate services in return.
South Africa’s tax to GDP ratio is on par with that of the United States (24.8%), Korea (25%), Australia (25.6%) and Turkey (25.7%), according to the most recent figures from the Organisation for Economic Cooperation and Development.
Services “we can only dream of”
The countries with the highest tax to GDP ratios are Denmark, Sweden and Belgium, at 47.6%, 45.5% and 43.5% respectively.
Such countries have services “we can only dream of”, according to Jannie Rossouw, professor of economics at the University of South Africa.
With lower growth rates the budget deficit was going to be larger and the government was looking for ways to increase revenue, he noted. The state should have instituted a parallel spending review commission alongside the tax review committee.
“Unnecessary spending needs to be cut, as does the duplication in the work that government departments do,” he said. “There can be no holy cows; cut all the nice-to-haves.”
Companies could not be blamed for reducing the tax they paid “by manoeuvring optimally within the rules”. Where these avenues were available to them through policy, he said, the policy had to be changed.
Rossouw suggested that the review committee examine the way South Africa taxes interest. A large share of interest is merely compensation for the depreciation of capital through inflation.
South African interest rates
In South Africa, interest rates are very low and a review of tax on interest could encourage saving, he said.
Another challenge is the question of how to get the economy growing again, according to Rossouw.
Had the economy continued to grow at pre-financial crisis levels it would by now be roughly a quarter larger. Employment would have grown faster, the tax base would have grown and the reliance on support from the state, such as social grants would have been reduced, he said.
Other tax experts questioned a review of the tax system without addressing the problem of stagnating economic growth.
The terms of reference for the review committee make almost no reference to the questions of economic growth, said Ernie Lai King, executive at law firm Edward Nathan Sonnenbergs. “Its primary purpose appears to be revenue raising.”
Clearer economic growth strategies are required from the government as tax is only one way to enhance an economy.
Mining sector
When it comes to sectors like mining, additional taxes will not make South Africa attractive to foreign investors, he noted, particularly while, in the face of an ongoing labour relations battle, onerous and inefficiently administered regulation and poor adjudication of mineral rights.
Nazrien Kader, head of taxation services at Deloitte welcomed the review. It had been two decades since a holistic assessment of the tax system was done and it was “long overdue,” she said.
She welcomed work to ensure that companies pay the appropriate taxes within the countries in which they operate. This is particularly relevant in the African context she said.
The African Progress Panel, led by Kofi Annan, said in its 2013 report that “tax evasion continued to erode the revenue base for public finance in many countries”.
Intra-company trade creates “extensive scope for ‘mispricing’, enabling companies to report profits in low tax jurisdictions” while the use of offshore and shell companies hinders Africa’s tax authorities.
The panel estimated that trade mispricing costs Africa $38-billion annually between 2008 and 2010.